The shares of dry bulk shipping companies should climb further as they benefit from rising shipping prices, predicted Morgan Stanley in a note to investors today. Stronger demand for steel and other commodities should drive shipping prices higher, explained the firm, which upgraded dry bulk shippers Safe Bulkers (SB), Star Bulk Carriers (SBLK) and Golden Ocean Group (GOGL). 

POSITIVE CATALYSTS: "Strong" steel fundamentals, including high steels margins, increased spending by China on infrastructure, and strengthening demand by China for imported ore as a significant number of its furnaces close are among the factors that will push dry bulk shippers towards profitability, Morgan Stanley analyst Fotis Giannakoulis stated. The analyst and his team at the firm estimated that the price of shipping freight from Australia to China has lagged increases in the price of commodities by about 30%. Daily Capesize shipping rates could rise to $20,000-$25,000 per day in 2018, up from $15,000-$17,000 presently, contended Giannakoulis. In that base case scenario, shippers' net asset values would jump 200%-300%, he forecast. In 2017 and 2018, investors' focus will shift from whether the bulk shippers had enough liquidity to survive to when they will turn profitable and be able to pay dividends, Giannakoulis predicted.

STOCKS: The analyst upgraded Star Bulk Carriers and Golden Ocean Group to Overweight from Underweight, the firm's equivalent of a sell rating. He raised his rating on Safe Bulkers to Overweight from Equal Weight. All of the upgraded companies "have young fleets, mostly larger vessels, low cost structures," high operational and financial leverage to shipping price increases and the ability to start paying dividends by the end of 2018, Giannakoulis' team stated. Moreover, their stocks do not reflect any increases in the value of their vessels, which is still about 50% below historical norms, Giannakoulis contended. Their stock prices also lag recent increases in charter rates, Morgan Stanley's team believes.

WHAT'S NOTABLE: Among the publicly traded steelmakers that could benefit from stronger demand for steel are Steel Dynamics (STLD), Nucor (NUE), United States Steel (X) and AK Steel (AKS).

PRICE ACTION: Shares of Safe Bulkers are up 13%, Star Bulk Carriers is up over 15% and Golden Ocean has gained 7.5% in early trading.